Failing to plan is planning to fail. This old adage is certainly relatable to budgeting. A useful budget is predicated on proper planning, as well as a reliance on discipline and execution. To that point, you cannot execute a plan if no plan exists. You’ll find that all you need in order to prepare an effective budget is a few systematic steps, accompanied by some “rules of thumb”.

Step 1: Budget Your Income

The first step in preparing a budget is determining how much you earn as regular, dependable sources of income. For most purposes, this will be your weekly, monthly or bi-weekly paycheck. When forming a budget, make sure you have your paycheck as a reference.

If you are a salaried employee, you simply note your gross pay, deductions (taxes, flexible spending accounts, 410K contributions, etc.) to arrive at your net pay, or “take home pay”. This take home pay will be the first line item on your budget.

If you are an hourly employee, you will follow the same procedure as above; however, it will be more important to note the percentage of each deduction, as opposed to the dollar amount of each deduction; due to the possible variability in hours. A rule of thumb for hourly employees: never budget for overtime pay. Consider overtime pay as “icing on the cake” and use it to pay off debt, stash in your emergency fund, or inject into savings (those are highlighted in the “budget analysis” section).

For those with more unpredictable income such as Commission-Only sales positions, a historic average, less a few percentage points is a conservative approach to budgeting income.

For instance, take the prior 12-month earnings, multiply it by 95%, and use the value as your budgeted earnings. This method will help curb spending. If earnings prove higher than the estimate, you will have spent under budget, and if the estimate is accurate then you will not have over-spent.

Rules of thumb: Do not budget for contingent income until the funds in hand. Likewise, do not budget for the future based on potential wage increases.

Step 2: Budget Your Expenses

Now that you’ve determined an accurate income number, it’s time to see where all that hard earned take-home pay goes. This can be very eye-opening if you’ve never done it before. However, it can be very liberating if you find frivolous expenses that can easily be omitted. The method for recording expenses can vary.

Some may find it useful to use a sample of historic bank statements (3 months is a good timeframe). Others may prefer to use invoices for fixed expenses such as utilities, rent/mortgage payments, phone bills, and the like. Leave no stone uncovered when attempting to unearth expenses.

Make sure to be honest with yourself when recording your expenses. You know yourself and your family (if applicable). Use that self-knowledge to objectively evaluate what you can and cannot do without. The aptly named budget bill option, offered by some creditors, is also a useful tool for budgeting.

If you choose to evaluate invoices for certain expense numbers, make sure to be very cognizant of taxes and fees associated with services. Furthermore, pay attention to time-limited promotional deals. Make yourself aware of when the promotion ends and the amount by which your monthly bill will increase at that time. This practice will all but obviate unexpected hikes in your routine fixed expenses.

Step 3: Budget Analysis

The numbers are in. Where do you stand? If you’re at a deficit, meaning you spend more than you make, then two possible fixes are available: make more or spend less. Let’s assume you’ve exhausted your “making more” options.

The question of how to cut spending is one that only you can answer, given the dynamic of each expense as it relates to your specific situation. In this expense evaluation process, it is imperative to be honest with yourself about what you truly need. Take pride out of the equation, and this determination will be much simpler. It isn’t a matter of what you make, but what you do with what you make. In short, live within your means.

In addition to completely omitting unnecessary items, it may be helpful to evaluate spending related to necessities. You may find a way to lower these unavoidable expenses.

If you find that income is greater than expenses, what should you do with your surplus? There are four options. In this particular order:

Pay off credit cards or loans

Inject money into your emergency fund

Invest

Treat yourself or your family

Conclusion

Remember that budgeting is a very useful tool predicated on organization, discipline and cognizance of your lifestyle. The initial results of your first budget iteration may be discouraging, but stay the course. Life will become simpler and anxiety levels will undoubtedly diminish. If money grew on trees, you’d be wise to plant one. Since it doesn’t, you’re wise to budget. Best of Luck!